A battle over the company stock in
In a short, unsigned opinion, the justices said Tuesday they wouldn’t address arguments raised by the IBM defendants and the federal government that involved federal securities laws. The case asks whether IBM insiders can be liable under the Employee Retirement Income Security Act for failing to promptly disclose struggles in the company’s microelectronics division that led to a 7% drop in stock price.
IBM’s retirement plans committee argued that ERISA imposes no duty on the fiduciary of an employee stock ownership plan to act on inside information. The government, meanwhile, argued any duty to disclose such information would conflict with the objectives of the “complex insider trading and corporate disclosure requirements imposed by the federal securities laws,” according to the court.
The Second Circuit “did not address these arguments, and, for that reason, neither shall we,” the justices said, sending the case back to give the appeals court an “opportunity to decide whether to entertain these arguments in the first instance.”
Duty to Act
Justice Elena Kagan, in a concurring opinion joined by Justice Ruth Bader Ginsburg, said retirement plan fiduciaries sometimes have a duty to act on inside corporate information under ERISA.
The high court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer “recognizes that a fiduciary can have no obligation to take actions ‘violating the securities laws’ or ‘conflicting’ with their ‘requirements’ or ‘objectives,’” she said. “At the same time, the decision explains that when an action does not so conflict, it might fall within an ESOP fiduciary’s duty—even if the securities laws do not require it.”
Kagan emphasized that the Second Circuit may find the IBM defendants waived the right to advance arguments involving securities law by failing to raise those arguments below.
Justice Neil M. Gorsuch, in his concurring opinion, said he doesn’t read the court’s ruling in Dudenhoeffer as broadly as Kagan.
The court never held that a lawsuit “may proceed anytime a plaintiff is able to conjure a hypothetical helpful action that would’ve been consistent with the securities laws,” he said.
Gorsuch advised the Second Circuit to consider the securities law issue, saying that if it isn’t “addressed immediately on remand, it will only prove unavoidable later.”
ERISA attorneys say the disagreement between Kagan and Gorsuch may result in the high court considering the issue in another case.
“Other ESOP cases will now be able to cite the dueling concurrences as indications of what the Supreme Court meant in Dudenhoeffer—and it is conceivable that one of these new cases will make it to the Supreme Court before the Second Circuit decides this case on remand,” said William Jay, a partner and co-chair of Goodwin Procter LLP’s appellate litigation practice.
IBM said in an emailed statement that it’s “gratified by the Supreme Court’s decision to vacate the Second Circuit’s unfavorable decision.”
“This case has important implications for businesses’ ability to offer strong employee stock ownership plans and for employees, across all industries, to invest in their companies,” the company said.
The plan participants who brought the lawsuit also lauded the court’s ruling.
“We are pleased with the court’s decision and look forward to further advocacy on behalf of our clients in the Second Circuit,” Sam Bonderoff, counsel for the participants and a partner at Zamansky LLC, said in an email.
The case is Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, unpublished 1/14/20.